Leading Mutual Fund Distributors are weighing the option of entering the asset management business by using the MF Lite regulation and launching a passive Fund of Funds.
The MF Lite regulatory framework, which came into effect in March, is designed for passively managed MF schemes. It lowers entry barriers, ease compliance and promote passive investing.
Ideal entry
Aditya Agarwal, co-founder and CEO, Wealthy, a wealth tech platform for MF distributors and wealth managers, said, “The MF Lite regulation creates a perfect entry point for established distributors to evolve as asset managers without abandoning the open architecture model that their clients value.”
Since passive funds simply track indices, MFDs can offer their own products alongside others without compromising their advisory integrity, he added.
Private Equity funds and pooled vehicles can apply for the MF Lite license if they have at least 5 years of experience managing ₹2,500 crore in committed capital. The AMC must maintain a minimum net worth of ₹35 crore, which can be reduced to ₹25 crore after five consecutive years of profitability.
Jignesh Madhwani, Founder and Director, Torin Wealth Management said MF Lite can be a game-changer allowing large distributors with scale and research depth to evolve as a mini-AMCs by launching FoFs which offer investors curated baskets of funds across AMCs under one umbrella.
While the real challenge will be governance and compliance, he said it will add healthy competition and more choice for investors in the long run.
Sunil Subramaniam, Director of independent think-tank Sense and Simplicity, said investors are increasingly preferring passive funds where the expense ratios are lower than actively managed funds. By launching MF Lite AMCs, MFDs can keep the entire income stream to themselves, but only large distributors will attempt this as they have to achieve scale for long-term sustainability, he said.
Likely entrants
Some of the top MFDs who are potential candidates include Prudent Corporate Advisory Services, Anand Rathi Wealth, Julius Baer Wealth Advisors (India), Standard Chartered Bank, Scripbox.com, Geojit Financial Services and Wealth India Financial Services.
Currently, MF distributors recommend various schemes based on investors’ risk profiles. Once they enter the MF business on their own, they can launch FoFs by combining the top-performing schemes and raising money from investors. These funds are then deployed as per the scheme document.
Investments through FoF have been gaining traction after it was classified as an equity investment for calculating long-term capital gain tax. The Total Expense Ratio of FoF varies between 1 and 2.25 per cent.